California Labor and Employment Defense Blog

Court Clarifies When Commissions Are "Earned" or "Vested" -- Sciborski v. Pacific Bell Directory

Most commission plans contain some sort of caveat to the effect that the employer reserves the right to change or modify the commission calculation at any time before the commission is earned or paid out.  This can be problematic in California, as commissions are a form of "wages" which are fully protected by the Labor Code.  And the Labor Code generally prohibits the reduction of any wage once it has become earned and vested.        

Determing when a commission is vested (and thus no longer subject to reduction) is a tricky business that involves an interplay between private contract terms and public wage protection statutes.  The recent opinion of the Fourth District Court of Appeals in Sciborski v. Pac. Bell Directory contains some very useful guidance, however.

Sciborski had been paid a commission on an account that the Company claimed she had been assigned only due to a "clerical error."  The Company claimed that proper assignment of the account was a threshold condition that had not been satisfied and that no commission had been properly earned.  The Court disagreed.  It found that the parties' commission agreement did not expressly address this scenario.  More importantly, the Court also found that any implied contract term that would deny a commission under these circumstances would be unenforceable under California law in any event. 

[A]n employer's right to define an “earned” commission in the employment contract is not unlimited. Generally, the essence of an advance is that at the time of payment the employer cannot determine whether the commission will eventually be earned because a condition to the employee's right to the commission has yet to occur or its occurrence as yet is otherwise unascertainable.  Thus, for example, an employer may expressly condition an earned sales commission on the sale becoming final (e.g., no returns within a specified time or final payment received) or on the employee completing work in providing follow-up services to the customer.  But an employer may not require an employee to agree to a wage deduction in the guise of recouping an advance based on conditions that are unrelated to the sale and/or that merely reflect the employer's attempt to shift the cost of doing business to an employee.  Where a deduction is unpredictable, and is taken without regard to whether the losses were due to factors beyond the employee's control, an employer cannot avoid a finding that its sales commission policy is unlawful simply by asserting that the deduction is just a step in its calculation of commission income.

(Internal citations and punctuation omitted)

     The message of Sciborski is that one-sided conditions on an employee's right to finally "earn" a commission are likely unenforceable.   If the employee has done all of the work necessary to make the sale and the revenue is received by the employer, then a court may reject attempts to impose additional conditions -- especially where these conditions are  "unrelated to the sale," "unpredictable," or "beyond the employee's control." 

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